Item 1A. Risk Factors
We are subject to uncertainties and risks due to the nature of the business activities we conduct. The following information describes certain uncertainties and risks that could affect our business, financial condition or results of operations or could cause actual results to differ materially from estimates or expectations contained in our forward-looking statements. This section does not describe all risks applicable to us, our industry or our business, and it is intended only as a summary of known material risks that are specific to us. We may experience additional risks and uncertainties not currently known to us or that we currently deem to be immaterial which may materially and adversely affect our business, financial condition and results of operations.
Risks Related to our Business and the Industry in which we Operate
The substantial amount of indebtedness incurred to finance construction of the Rio Grande LNG Facility may adversely affect our subsidiaries' cash flow and the ability to operate their business, remain in compliance with debt covenants and make payments on indebtedness.
Our subsidiaries have incurred a substantial amount of indebtedness. This substantial level of indebtedness increases the possibility that they may be unable to generate cash sufficient to pay, when due, the principal or interest on such indebtedness or to refinance such indebtedness ahead of its scheduled maturity. This indebtedness and obligations thereunder could have other important consequences to you as a stockholder. For example:
• any failure to comply by our subsidiaries, including the Rio Grande Project Entities, with the obligations under their debt instruments, including financial and other restrictive covenants, could result in an event of default under the applicable instrument;
• we may be more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse change in government regulation affecting our subsidiaries' ability to pay obligations when due;
• our subsidiaries may need to dedicate a substantial portion of their future cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions, other general corporate purposes and any future dividends or share repurchases;
• the ability to refinance indebtedness will depend on the condition of credit markets and capital markets, and our subsidiaries' financial condition at such time. Any refinancing could be at higher interest rates and may require compliance with more onerous covenants, which could further restrict business operations;
• we may have limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
• our indebtedness may place us and our subsidiaries, including the Rio Grande Project Entities, at a competitive disadvantage compared to competitors that have less debt.
Restrictions in debt agreements may prevent certain beneficial transactions.
In addition to restrictions on the ability of our subsidiaries to make distributions or incur additional indebtedness, the agreements governing our subsidiaries' indebtedness also contain various other covenants that may prevent them from engaging in beneficial transactions, including limitations on the ability of certain of our subsidiaries to:
• make distributions or certain investments;
• incur additional indebtedness;
• purchase, redeem or retire equity interests;
• sell or transfer assets;
• incur liens;
• enter into transactions with affiliates; and
• consolidate, merge, sell or lease all or substantially all of their assets.
A breach of the covenants and other restrictions in any of our subsidiaries' indebtedness could result in an event of default thereunder. Such a default may allow the holders of such indebtedness to accelerate the related indebtedness, which may result in foreclosure on the assets owned by the applicable subsidiary, which in the case of the Rio Grande Project Entities, includes the equity interests in the Rio Grande Project Entities, and in the case of the ND Finance Subsidiaries, includes the equity interests in the entities that own NextDecade's interests in the Joint Ventures.
Conducting a portion of our operations through joint ventures in which we do not have 100% ownership interest, and which are not operated solely for the benefit of our stockholders, exposes us and our stockholders to risks and uncertainties, many of which are outside of our control.
We currently operate parts of our business through the Joint Ventures, in which we do not have 100% ownership interest, and we may enter into additional joint ventures in the future. Joint ventures and minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and/or compliance risks associated with the joint venture or minority investment. For example, except for the Member Reserved Matters (as defined below), the affairs of the Joint Ventures will otherwise be managed by their respective boards of managers (the “JV Boards”). The JV Boards are composed of (i) up to four managers appointed by us (the “Class A Managers”), including, in respect of the Phase 1 Holdings board of managers, one Class A Manager designated by Global LNG North America Corp., a subsidiary of TotalEnergies SE, and (ii) managers appointed by members holding a minimum percentage of the Class B limited liability company interests in the respective Joint Venture (the “Class B Managers”). Approval of any matter by a JV Board will require the consent of a majority of the Class A Managers voting on the matter and Class B Managers representing a majority of the Class B limited liability company interests in such Joint Venture voting for such matter, as applicable; provided that (i) certain specified “qualified matters,” “supermajority matters,” and “unanimous matters” are reserved to the approval of the members of the Joint Venture (the "Member Reserved Matters") holding a requisite percentage of the applicable classes of limited liability company interests in such Joint Venture, and (ii) related party transactions will be subject to approval in accordance with the procedures specified in the applicable company agreement of the Joint Venture (the "JV Agreements"). Pursuant to the JV Agreement for Phase 1 Holdings, we will be entitled to receive up to approximately 20.8% of distributions of available cash of Phase 1 Holdings to its members during operations; provided, that a majority of the Phase 1 Holdings distributions to which we are otherwise entitled will be paid for any distribution period only after the financial equity partners receive an agreed distribution threshold in respect of such distribution period and certain other payments from prior distribution periods, if any, are made. Any such in distributions that we would otherwise have been entitled to will accrue as an to be paid out in future periods in which Phase 1 Holdings meets the applicable target distribution threshold for the financial equity partners. Pursuant to the JV Agreement for Train 4 Holdings, we will receive 40% of distributions of available cash generated from Train 4 operations, which will increase to 60% when the equity partners receive a certain return on their investments in Train 4 LLC. Pursuant to the JV Agreement for Train 5 Holdings, we will receive 50% of distributions of available cash generated from Train 5 operations, which will increase to 70% when the equity partners receive a certain return on their investments in Train 5 LLC.
Challenges and risks presented by joint venture structures not otherwise present with respect to our wholly owned subsidiaries and direct operations, include:
• the Joint Ventures may fail to generate the expected financial results, and the return may be insufficient to justify our investment of effort and/or funds;
• we may not control the Joint Ventures or our venture partners may hold veto rights over certain actions;
• we may experience impasses or disputes with our joint venture partners on certain decisions, which could require us to expend additional resources to resolve such impasses or disputes, including litigation or arbitration;
• we may not have control over the timing or amount of distributions from the Joint Ventures;
• our venture partners may have business or economic interests that are inconsistent with ours and may take actions contrary to our interests;
• our venture partners may fail to fund capital contributions or fail to fulfill their obligations as partners;
• the arrangements governing the Joint Ventures may contain restrictions on the conduct of our business and may contain certain conditions or milestone events that may never be satisfied or achieved;
• we may suffer losses as a result of actions taken by our venture partners with respect to the Joint Ventures; and
• it may be difficult for us to exit the Joint Ventures if an impasse arises or if we desire to sell our interest for any reason.
We believe an important element in the success of any joint venture is a solid relationship between the members of that venture. If there is a change in ownership, a change of control, a change in management or management philosophy, a change in business strategy or another event with respect to a member of the Joint Ventures that adversely impacts the relationship between the venture partners, it could adversely impact such venture.
If our partners are unable or unwilling to invest in one or more of the Joint Ventures in the manner that is anticipated or otherwise fail to meet their contractual obligations, such Joint Venture may be unable to adequately perform and conduct its respective operations, or may require us to provide, or make other arrangements for additional financing for the Joint Venture. Such financing may not be available on favorable terms, or at all.
Venture partners, controlling shareholders, management or other persons or entities who control them may have economic or business interests, strategies or goals that are inconsistent with ours. Business decisions or other actions or omissions of the venture partners, controlling shareholders, management or other persons or entities who control them may adversely affect the value of our investment, result in litigation or regulatory action against us and otherwise damage our reputation. Any such circumstance could materially adversely affect our results of operations, financial condition, cash flows and/or prospects.
Our projects are in the development and construction phases, and the success of such projects is unpredictable.
We are not expected to generate cash flow, or even obtain revenues, from our LNG liquefaction and export activities unless and until the Rio Grande LNG Facility is operational. Additionally, we do not expect to generate cash flow from any CCS projects until such projects are installed and operational. Accordingly, distributions to investors may be limited, delayed, or non-existent.
Our cash flow and consequently our ability to distribute earnings will be dependent upon our ability to complete Phase 1, Train 4 and Train 5 of the Rio Grande LNG Facility and future phases of development, and implement CCS systems and thereafter generate cash and net operating income from operations. The ability to complete the initial phases of development of the Rio Grande LNG Facility, as discussed further below, is dependent upon, among other things, performance of third-party contractors and customers under their agreements with the applicable Rio Grande Project Entity. Our ability to install any CCS systems, as discussed further below, is dependent on the development of front-end engineering and design (“FEED”), commercialization of the CCS systems, and contracting with third parties to install the CCS systems. We do not expect the Rio Grande Project Entities to generate any revenue until the completion of construction of the applicable phase of development of the Rio Grande LNG Facility or to generate any revenue from CCS systems until successful installation, and even after completion of construction or installation, financing and numerous other factors may reduce our cash flow. As a result, we may not make distributions of any amount or any distributions may be delayed.
We will be required to seek additional debt and equity financing in the future to complete future phases of the Rio Grande LNG Facility and the development of any CCS projects and may not be able to secure such financing on acceptable terms, or at all.
Since we will be unable to generate any revenue while we are in the development and construction stages, which will be for multiple years with respect to each phase of construction of the Rio Grande LNG Facility, we will need additional financing to provide the capital required to execute our business plan. We will need significant additional funding to develop and construct future phases of the Rio Grande LNG Facility and any CCS projects as well as for working capital requirements and other operating and general corporate purposes.
Our ability to obtain the capital necessary to fund development and construction of future projects will depend on the condition of the credit and capital markets, which could become constrained due to factors outside our control. There can be no assurance that we will be able to raise sufficient capital on acceptable terms, or at all. If sufficient capital is not available on satisfactory terms, we may be required to delay, scale back or eliminate the development of business opportunities, and our operations and financial condition may be adversely affected to a significant extent.
Additional debt financing for future phases of development at the Rio Grande LNG Facility, if obtained, may involve agreements that include liens on subsequent trains or other assets and covenants limiting or restricting our ability to take specific actions, such as paying dividends or making distributions, incurring additional debt, acquiring or disposing of assets and increasing expenses. Debt financing would also be required to be repaid regardless of our operating results.
In addition, the ability to obtain financing for future phases of the Rio Grande LNG Facility is expected to be contingent upon, among other things, entry into EPC agreements for construction of subsequent trains and sufficient long-term commercial agreements prior to the commencement of construction. For additional information regarding our ability to enter into such agreements, see “— Our ability to generate cash is substantially dependent upon us entering into satisfactory contracts with third parties and the performance of those third parties under those contracts .”
We may be subject to risks related to doing business in, and having counterparties based in, foreign countries.
We may engage in operations or make substantial commitments to and investments in, and enter into agreements with, counterparties located outside the U.S., which would expose us to political, governmental and economic instability and foreign currency exchange rate fluctuations. We also may participate in global carbon capture credit markets to the extent those develop and become available to our CCS projects or their customers.
Any disruption caused by these factors could harm our business, results of operations, financial condition, liquidity and prospects. Risks associated with potential operations, commitments and investments outside of the U.S. include but are not limited to risks of:
• currency exchange restrictions and currency fluctuations;
• war or terrorist attack;
• expropriation or nationalization of assets;
• renegotiation or nullification of existing contracts or international trade arrangements;
• changing political conditions;
• macro-economic conditions impacting key markets and sources of supply;
• changing laws and policies affecting trade, taxation, incentives, financial regulation, immigration, and investment, including laws and policies regarding the verification and trading of carbon capture credits;
• the implementation of tariffs by the U.S. or foreign countries in which we, our customers or our vendors do business;
• duplicative taxation by different governments;
• general hazards associated with the assertion of sovereignty over areas in which operations are conducted, transactions occur, or counterparties are located; and
• the unexpected credit rating downgrade of countries in which our LNG customers are based.
As our reporting currency is the U.S. dollar, any operations conducted outside the U.S. or transactions denominated in foreign currencies would face additional risks of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. In addition, we would be subject to the impact of foreign currency fluctuations and exchange rate changes on our financial reports. These translations could result in changes to our results of operations from period to period.
We face risks related to the uncertainty regarding the future of international trade agreements and the potential for retaliatory tariffs on LNG.
The current uncertainty involving international trade measures has created volatility in the LNG markets and may result in higher costs and delays for major industrial projects under development and construction, such as the Rio Grande LNG Facility. We face potential exposure to evolving U.S. tariffs, and potential retaliatory actions that may be imposed by other countries in response to U.S. tariffs, primarily on LNG exports.
Any future changes to the United States’ trade relationship with major LNG importing nations, including through the imposition of further tariffs, could have an adverse impact on any LNG SPAs entered into with customers based in such countries. If any of our LNG SPAs is terminated for any reason or expires in accordance with its terms, such tariffs could have an adverse impact on our ability to market the available capacity of the Rio Grande Project Entities, by reducing demand from customers for U.S. LNG exports.
Costs for the Rio Grande LNG Facility and any CCS projects are subject to various factors.
Construction costs for the Rio Grande LNG Facility and any CCS projects will be subject to various factors such as economic and market conditions, government policy, claims and litigation risk, competition, the final terms of any definitive agreement for services with EPC service providers, change orders, delays in construction, legal and regulatory requirements, unanticipated regulatory delays, site issues, increased component and material costs, escalation of labor costs, labor disputes, increased spending to maintain construction schedules and other factors. In particular, costs are expected to be substantially affected by:
• global prices of nickel, steel, concrete, pipe, aluminum and other component parts of the Rio Grande LNG Facility or any CCS projects and the contractual terms upon which our contractors are able to source and procure required materials;
• any U.S. import tariffs or quotas on steel, aluminum, pipe or other component parts of the Rio Grande LNG Facility or any CCS projects, which may raise the prices of certain materials used in the Rio Grande LNG Facility;
• commodity and consumer prices (principally, natural gas, crude oil and fuels that compete with them in our target markets) on which our economic assumptions are based;
• the exchange rate of the U.S. Dollar with other currencies;
• changes in regulatory regimes in the U.S. and the countries to which we will be authorized to sell LNG;
• changes in regulatory regimes in the U.S. and the countries that seek to develop and regulate a market for the trading of global carbon capture credits;
• levels of competition in the U.S. and worldwide;
• changes in the tax regimes in the countries to which we sell LNG or in which we operate;
• cost inflation relating to the personnel, materials and equipment used in our operations;
• delays caused by events of force majeure or unforeseeable climatic events;
• interest rates; and
• the risks referred to below under the caption " Our construction and operations activities will be subject to a number of development risks, operational hazards, regulatory approvals and other risks which may not be fully covered by
insurance, and which could cause cost overruns and delays that could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects ."
Our EPC agreements for Phase 1, Train 4 and Train 5 allocate certain cost risks to Bechtel; however, events related to the above activities may cause actual costs of the Rio Grande LNG Facility to vary from the range, combination and timing of assumptions used for projected costs of the Rio Grande LNG Facility, in addition to affecting our willingness to make a positive FID on future phases of development at the Rio Grande LNG Facility or on any CCS projects. Such variations may be material and adverse, and an investor may lose all or a portion of its investment.
We will be dependent on third-party contractors for the successful completion of the Rio Grande LNG Facility, any CCS projects and related infrastructure, and any failure by our contractors to perform their contractual obligations could have a material adverse impact on our projects.
The construction of the Rio Grande LNG Facility is expected to take several years, will be confined to a limited geographic area and could be subject to delays, cost overruns, labor disputes and other factors that could adversely affect financial performance or impair our ability to execute our scheduled business plan.
Timely and cost-effective completion of the Rio Grande LNG Facility and any CCS projects in conformity with agreed-upon specifications will be highly dependent upon the performance of third-party contractors pursuant to their agreements. We have not yet entered into definitive agreements with certain of the contractors, advisors and consultants necessary for the development and construction for future phases of development at the Rio Grande LNG Facility or any CCS projects. We may not be able to successfully enter into such construction agreements on terms or at prices that are acceptable to us.
Further, faulty construction that does not conform to our design and quality standards may have an adverse effect on our business, results of operations, financial condition and prospects. For example, improper equipment installation may lead to a shortened life of our equipment, increased operations and maintenance costs or a reduced availability or production capacity of the affected facility. The ability of our third-party contractors to perform successfully under any agreements to be entered into is dependent on a number of factors, including force majeure events and such contractors’ ability to:
• design, engineer and receive critical components and equipment necessary for the Rio Grande LNG Facility and any CCS projects to operate in accordance with specifications and address any start-up and operational issues that may arise in connection with the commencement of commercial operations;
• attract, develop and retain skilled personnel and engage and retain third-party subcontractors, and address any labor issues that may arise;
• post required construction bonds and comply with the terms thereof, and maintain their own financial condition, including adequate working capital;
• adhere to any warranties the contractors provide in their EPC contracts; and
• respond to difficulties such as equipment failure, delivery delays, schedule changes and failure to perform by subcontractors, some of which are beyond their control, and manage the construction process generally, including engaging and retaining third-party contractors, coordinating with other contractors and regulatory agencies and dealing with inclement weather conditions.
Furthermore, we may have disagreements with our third-party contractors about different elements of the construction process, which could lead to the assertion of rights and remedies under the related contracts, resulting in a contractor’s unwillingness to perform further work on the relevant project. We may also face difficulties in commissioning a newly constructed facility at the Rio Grande LNG Facility. Any of the foregoing issues or significant project delays in the development or construction of the Rio Grande LNG Facility and, to the extent applicable, any CCS projects could materially and adversely affect our business, results of operations, financial condition and prospects.
Commissioning and operation of the Rio Grande LNG Facility will also require the ability to deliver natural gas to the Rio Grande LNG Facility via pipelines, certain of which are under development and construction and will require securing rights-of-way along the proposed route. Pipeline construction could also be delayed or abandoned for any of many other reasons, such as it becoming economically disadvantageous to the owner, a failure to obtain or maintain all necessary permits, approvals and licenses for the construction and operation, mechanical or structural failures, inadvertent damages during construction, natural disasters, or any terrorist attack, including cyberterrorism. Any such delays in pipeline construction could delay the development of the Rio Grande LNG Facility and its becoming operational.
Our ability to generate cash is substantially dependent upon us entering into satisfactory contracts with third parties and the performance of those third parties under those contracts.
We have entered into long-term commercial arrangements with customers for products from the Rio Grande LNG Facility, each of which is subject to preconditions, including the Rio Grande LNG Facility becoming operational. We are dependent on each customer’s continued willingness and ability to perform its obligations under its sale and purchase agreement. We are also exposed to the credit risk of any guarantor of these customers’ obligations under their respective sale and purchase agreement in the event that we must seek recourse under a guaranty. If any customer fails to perform its obligations under its sale and purchase agreement, our business, contracts, financial condition, operating results, cash flow, liquidity and prospects could be materially and adversely affected, even if we were ultimately successful in seeking damages from that customer or its guarantor for a breach of the sale and purchase agreement.
We have not yet entered into any definitive commercial arrangements to install any CCS systems. We also have not entered into, and may never be able to enter into, satisfactory commercial arrangements with third-party suppliers of feedstock or other required supplies to the Rio Grande LNG Facility.
Our business strategy regarding how and when the Rio Grande LNG Facility’s export capacity or, LNG produced by the Rio Grande LNG Facility, or any CCS systems are marketed may change based on market factors. Without limitation, our business strategy may change due to inability to enter into agreements with customers or based on our or market participants’ views regarding future supply and demand of LNG, prices, available worldwide natural gas liquefaction capacity or regasification capacity, the availability and efficiency of a market for carbon capture credits or other factors. If efforts to market LNG produced by the Rio Grande LNG Facility, the Rio Grande LNG Facility’s expansion export capacity, or any CCS systems are not successful, our business, results of operations, financial condition and prospects may be materially and adversely affected.
Our exposure to the performance and credit risks of counterparties may adversely affect our operating results, liquidity and access to financing.
Our operations involve our entering into various construction, purchase and sale, supply and other transactions with numerous third parties. In such arrangements, we will be exposed to the performance and credit risks of our counterparties, including the risk that one or more counterparties fail to perform their obligations under the applicable agreement. Some of these risks may increase during periods of commodity price volatility. In some cases, we will be dependent on a single counterparty or a small group of counterparties, all of whom may be similarly affected by changes in economic and other conditions. These risks include, but are not limited to, risks related to the construction discussed above in “ We will be dependent on third-party contractors for the successful completion of the Rio Grande LNG Facility and any CCS projects, and these contractors may be unable to complete the Rio Grande LNG Facility or any CCS projects or may build a non-conforming Rio Grande LNG Facility or any CCS projects. ” Defaults by suppliers, customers and other counterparties may adversely affect our operating results, liquidity and access to additional financing.
Our construction and operations activities will be subject to a number of development risks, operational hazards, regulatory approvals and other risks which may not be fully covered by insurance, and which could cause cost overruns and delays that could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
Development and construction of the Rio Grande LNG Facility and any CCS projects will be subject to the risks of delay or cost overruns inherent in any construction project resulting from numerous factors, including, but not limited to, the following:
• difficulties or delays in obtaining, or failure to obtain, sufficient debt or equity financing on reasonable terms;
• failure to obtain or maintain all necessary government and third-party permits, approvals and licenses, or to comply with all the terms and conditions of those authorizations, for the construction and operation of the Rio Grande LNG Facility and any CCS projects, or litigation concerning such permits, approvals and licenses;
• failure to obtain or maintain commercial agreements that generate sufficient revenue to support the financing and construction of the Rio Grande LNG Facility or any CCS projects;
• difficulties in engaging qualified contractors necessary to the construction of the contemplated Rio Grande LNG Facility, in the event our main EPC contractor needs to be replaced for any reason, or for future phases of development at the Rio Grande LNG Facility or any CCS projects;
• shortages of equipment, materials or skilled labor;
• natural disasters and catastrophes, such as hurricanes, explosions, fires, floods, industrial accidents and terrorism;
• delays in the delivery of ordered materials;
• work stoppages and labor disputes;
• opposition from environmental and social groups, landowners, tribal groups, local groups and other advocates could result in organized protests, attempts to block or sabotage our construction activities or operations, intervention in regulatory or administrative proceedings involving our assets, or lawsuits or other actions designed to prevent, disrupt or delay the construction or operation of the Rio Grande LNG Facility or any CCS projects;
• competition with other domestic and international LNG export facilities;
• unanticipated changes in domestic and international market demand for and supply of natural gas and LNG, which will depend in part on supplies of and prices for alternative energy sources and the discovery of new sources of natural resources;
• insufficiency in domestic and international market demand for verified carbon capture credits;
• unexpected or unanticipated additional improvements; and
• adverse general political or economic conditions.
Delays beyond the estimated development periods, as well as cost overruns, could increase the cost of completion beyond the amounts that are currently estimated, which could require us to obtain additional sources of financing to fund the activities until the Rio Grande LNG Facility is constructed and operational, which could cause further delays. The need for additional financing may also make the Rio Grande LNG Facility uneconomic. Any delay in completion of the trains of the Rio Grande LNG Facility may also cause a delay in the receipt of revenues projected from the Rio Grande LNG Facility or cause a loss of one or more customers. As a result, any
significant construction delay, whatever the cause, could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
Rio Grande LNG Facility operations will be subject to all of the hazards inherent in the receipt and processing of natural gas to LNG, and associated short-term storage including:
• damage to pipelines and plants, related equipment, loading terminal, and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters, acts of terrorism and acts of third parties;
• damage from subsurface and/or waterway activity (for example, sedimentation of shipping channel access);
• leaks of natural gas, or natural gas liquids, or losses of natural gas, or natural gas liquids, as a result of the malfunction of equipment or facilities;
• fires, ruptures and explosions;
• other hazards that could also result in personal injury and loss of life, pollution and suspension of operations; and
• hazards experienced by other operators that may affect our operations by instigating increased regulations and oversight.
Any of these risks could adversely affect our ability to conduct operations or result in substantial loss to us as a result of claims for:
• injury or loss of life;
• damage to and destruction of property, natural resources and equipment;
• pollution and other environmental damage;
• regulatory investigations and penalties;
• suspension of our operations;
• failure to perform contractual obligations; and
• repair and remediation costs.
Due to the scale of the Rio Grande LNG Facility, we may encounter capacity limits in insurance markets, thereby limiting our ability to economically obtain insurance with our desired level of coverage limits and terms. With respect to the Rio Grande LNG Facility or any CCS projects, we may elect not to obtain insurance for any or all of these risks if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, contractual liabilities and pollution and environmental risks generally are not fully insurable. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition and results of operations.
We may experience increased labor costs, and the unavailability of skilled workers or our failure to attract and retain qualified personnel could adversely affect us. In addition, changes in our senior management or other key personnel could affect our business operations.
We are dependent upon the available labor pool of skilled employees authorized to work in the U.S. We compete with other energy companies and other employers to attract and retain qualified personnel with the technical skills and experience required to construct and operate our facilities and pipelines and to provide our customers with the highest quality service. A shortage in the labor pool of skilled workers able to legally work in the U.S. or other general inflationary pressures or changes in applicable laws and regulations could make it more difficult for us to attract and retain qualified personnel and could require an increase in the wage and benefits packages that we offer, thereby increasing our operating costs. Any increase in our operating costs could materially and adversely affect our business, financial condition, operating results, liquidity and prospects.
We depend on our executive officers for various activities. We do not maintain key person life insurance policies on any of our personnel. Although we have arrangements relating to compensation and benefits with certain of our executive officers, we do not have any employment contracts or other agreements with key personnel binding them to provide services for any particular term. The loss of the services of any of these individuals could have a material adverse effect on our business.
Technological innovation, competition or other factors may negatively impact our anticipated competitive advantage or our processes.
Our success will depend on our ability to create and maintain a competitive position in the natural gas liquefaction and carbon capture and storage industries. We do not have any exclusive rights to any of the liquefaction technologies that we will be utilizing in the Rio Grande LNG Facility. In addition, the LNG technology we are using in the Rio Grande LNG Facility may face competition due to the technological advances of other companies or solutions, including more efficient and cost-effective processes or entirely different approaches developed by one or more of our competitors or others. Although we have applied for and obtained patents relating to CCS processes and rely on other procedures to protect our intellectual property, we may be unable to prevent third parties from utilizing our intellectual property; see “— We depend on our intellectual property for CCS projects, and our failure to protect that intellectual property could adversely affect the future growth and success of our CCS business. ”
Continuing technological changes in the market for carbon capture solutions could make any CCS projects less competitive or obsolete, either generally or for particular applications. Our future success will depend upon our ability to develop and introduce a variety of new capabilities and enhancements to any CCS offerings to address the changing needs of the carbon capture markets. Delays in introducing enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential customers to utilize competing projects or solutions.
We depend on our intellectual property for CCS projects, and our failure to protect that intellectual property could adversely affect the future growth and success of our CCS business.
We rely on a combination of internal procedures, nondisclosure agreements, licenses, patents, trademarks and copyright law to protect our intellectual property and know-how. Our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged.
While confidentiality agreements are typically put in place before sharing confidential technical information, there is a risk the potential partner could violate the confidentiality agreement and use our technical information for its own benefit or the benefit of others or compromise the confidentiality. We have applied for and obtained some U.S. patents and will continue to evaluate the registration of additional patents, as appropriate. We cannot guarantee that any of our pending applications will be approved. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge them. A failure to obtain registrations in the United States or elsewhere could limit our ability to protect our proprietary processes and could impede our business. Further, the protection of our intellectual property may require expensive investment in protracted litigation and the investment of substantial management time and there is no assurance we ultimately would prevail or that a successful outcome would lead to an economic that is than the investment in the .
In addition, we may be unable to prevent third parties from using our intellectual property rights and know-how without our authorization or from independently developing intellectual property that is the same as or similar to ours. The unauthorized use of our know-how by third parties could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our CCS business or increase our expenses as we attempt to enforce our rights.
Failure of LNG exported from the U.S. Gulf Coast to be a competitive source of energy for international markets could adversely affect our customers and could materially and adversely affect our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
Operations of the Rio Grande LNG Facility will be dependent upon our ability to deliver LNG supplies from the U.S., which is primarily dependent upon LNG being a competitive source of energy internationally. The success of the Rio Grande LNG Facility is dependent, in part, on the extent to which LNG can, for significant periods and in significant volumes, be supplied from the U.S. Gulf Coast and delivered to international markets at a lower cost than the cost of alternative energy sources. Through the use of improved exploration technologies, additional sources of natural gas may be discovered outside the U.S., which could increase the available supply of natural gas outside the U.S. and could result in natural gas in those markets being available at a lower cost than that of LNG exported to those markets. The price of domestic natural gas, which is subject to change for reasons outside our control, also affects the competitiveness of U.S.-sourced LNG exports.
Additionally, the Rio Grande LNG Facility will be subject to the risk of LNG price competition at times when we need to replace any existing LNG sale and purchase contract, whether due to natural expiration, default or otherwise, or enter into new LNG sale and purchase contracts. Periods of commodity price volatility, supply-demand imbalances, higher US feedgas costs, or lower international marker prices could reduce the competitiveness of U.S. LNG, particularly when replacing expiring customer agreements or contracting incremental capacity. Factors relating to competition may prevent us from entering into a new or replacement LNG sale and purchase contract on economically comparable terms as prior LNG sale and purchase contracts, or at all. Factors which may negatively affect potential demand for LNG from our liquefaction projects are diverse and include, among others:
• increases in worldwide LNG production capacity and availability of LNG for market supply;
• decreases in demand for LNG or increases in demand for LNG, but at levels below those required to maintain current price equilibrium with respect to supply;
• increases in the cost of natural gas feedstock supplied to any project;
• decreases in the cost of competing sources of natural gas or alternate sources of energy such as coal, heavy fuel oil, diesel, nuclear, hydroelectric, wind and solar;
• decrease in the price of non-U.S. LNG, including decreases in price as a result of contracts indexed to lower oil prices;
• increases in capacity and utilization of nuclear power and related facilities;
• increases in the cost of LNG shipping; and
• displacement of LNG by pipeline natural gas or alternate fuels in locations where access to these energy sources is not currently available.
Political instability in foreign countries that import natural gas, or strained relations between such countries and the U.S. may also impede the willingness or ability of LNG suppliers, purchasers and merchants in such countries to import LNG from the U.S. Furthermore, some foreign purchasers of LNG may have economic or other reasons to obtain their LNG from non-U.S. markets or our competitors’ liquefaction facilities in the U.S.
As a result of these and other factors, LNG may not be a competitive source of energy internationally. The failure of LNG to be a competitive supply alternative to local natural gas, oil and other alternative energy sources in markets accessible to our customers could adversely affect the ability of our customers to deliver LNG from the U.S. on a commercial basis. Any significant impediment to the ability to deliver LNG from the U.S. generally or from the Rio Grande LNG Facility specifically could have a material adverse effect on our customers and our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
Decreases in the global demand for and price of natural gas (versus the price of imported LNG) could lead to reduced development of LNG projects worldwide.
We are subject to risks associated with the development, operation and financing of domestic LNG facilities. The development of domestic LNG facilities and projects is generally based on assumptions about the future price of natural gas and LNG and the conditions of the global natural gas and LNG markets. Natural gas and LNG prices have been, and are likely to remain in the future, volatile and subject to wide fluctuations that are difficult to predict. As a result, our activities will expose us to risks of commodity price movements, which we believe could be mitigated by entering into long-term LNG sales contracts. There can be no assurance that we will be successful in entering into or maintaining long-term LNG sales contracts. Additionally, the global LNG market could shift toward the use of shorter-term LNG sales contracts.
Fluctuations in commodity prices may create a mismatch between natural gas and petroleum prices, which could have a significant impact on our future revenues. Commodity prices and volumes are volatile due to many factors over which we have no control, including competing liquefaction capacity in North America; the international supply and receiving capacity of LNG; LNG marine transportation capacity; weather conditions affecting production or transportation of LNG from the Rio Grande LNG Facility; domestic and global demand for natural gas; the effect of government regulation on the production, transportation and sale of natural gas; oil and natural gas exploration and production activities; the development of and changes in the cost of alternative energy sources for natural gas and political and economic conditions worldwide.
Our activities are also dependent on the price and availability of materials for the construction of the Rio Grande LNG Facility, such as nickel, aluminum, pipe, and steel, which may be subject to import tariffs in the U.S. market and are all also subject to factors affecting commodity prices and volumes. In addition, authorities with jurisdiction over wholesale power rates in the U.S., Europe and elsewhere, as well as independent system operators overseeing some of these markets, may impose price limitations, bidding rules and other mechanisms which may adversely impact or otherwise limit trading margins and lead to diminished opportunities for gain. We cannot predict the impact energy trading may have on our business, results of operations or financial condition.
Further, the development of the Rio Grande LNG Facility takes a substantial amount of time, requires significant capital investment, may be delayed by unforeseen and uncontrollable factors and is dependent on our financial viability and ability to market LNG internationally.
The reduction or elimination of government incentives could adversely affect our business, financial condition, future results and cash flows.
We expect any CCS projects, following successful construction and deployment, to generate revenue from a combination of sources, including fees from source facilities, government incentives and carbon credits. Government incentives include federal income tax credits under Section 45Q of the Internal Revenue Code of 1986, as amended (the "Code"), which currently provides a federal income tax credit per metric ton of carbon captured and permanently stored. The availability of these government incentives have a significant effect on the economics and viability of any CCS projects, and any reduction or elimination of such incentives could adversely affect the growth of our CCS business, our financial condition and our future results.
Competition in the industries in which we operate is intense, and some of our competitors have greater financial, technological and other resources.
We plan to operate in the highly competitive area of LNG production and face intense competition from independent, technology-driven companies as well as from both major and other independent oil and natural gas companies and utilities.
Many competing companies have secured access to, or are pursuing development or acquisition of, LNG facilities and deployment of carbon capture processes in North America. We may face competition from major energy companies and others in pursuing our proposed business strategy. Some of these competitors have longer operating histories, more development experience, greater name recognition, superior tax incentives, more employees and substantially greater financial, technical and marketing resources than we currently possess. The superior resources that some of these competitors have available for deployment could allow them to
compete successfully against us, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
There may be shortages of LNG vessels worldwide, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
The construction and delivery of LNG vessels requires significant capital and long construction lead times, and the availability of the vessels could be delayed to the detriment of our business and customers due to the following:
• an inadequate number of shipyards constructing LNG vessels and a backlog of orders at these shipyards;
• political or economic disturbances in the countries where the vessels are being constructed;
• changes in governmental regulations or maritime self-regulatory organizations;
• work stoppages or other labor disturbances at the shipyards;
• bankruptcies or other financial crises of shipbuilders;
• quality or engineering problems;
• weather interference or catastrophic events, such as a major earthquake, tsunami, or fire; or
• shortages of or delays in the receipt of necessary construction materials.
We will rely on third-party engineers to estimate the future capacity ratings and performance capabilities of the Rio Grande LNG Facility and any CCS projects, and these estimates may prove to be inaccurate.
We will rely on third parties for the design and engineering services underlying our estimates of the future capacity ratings and performance capabilities of the Rio Grande LNG Facility and any CCS projects. Any of such facilities, when constructed, may not have the capacity ratings and performance capabilities that we intend or estimate. Failure of any of our facilities to achieve our intended capacity ratings and performance capabilities could prevent us from achieving the commercial start dates or otherwise impact the generation of revenue under our future commercial agreements and could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
We may not be successful in developing or constructing all of our proposed expansion projects.
We may not be able to successfully develop or construct some of our proposed expansion trains at the Rio Grande LNG Facility, whether due to lack of commercial interest, inability to obtain financing, inability to obtain adequate supply of materials and equipment to complete construction of our projects, inability to obtain necessary regulatory approvals (including as a result of political factors, environmental concerns or public opposition) or otherwise. Our ability to develop additional liquefaction facilities will also depend on the availability and pricing of LNG and natural gas in North America and other places around the world. If we are unable or unwilling to develop and construct additional expansion trains, our prospects for growth will be limited.
Carbon credit markets may not develop as quickly or efficiently as we anticipate or at all.
The continued development of global carbon credit marketplaces will be crucial for the successful deployment of any CCS projects, as we expect carbon credits to be a significant source of future revenue. The efficiency of the voluntary carbon credit market is currently affected by several concerns, including insufficiency of demand, the risk that reduction credits could be counted multiple times and a lack of standardization of credit verification. Delayed development of a global carbon credit market could negatively impact the commercial viability of any CCS projects and could limit the growth of the business and adversely impact our financial condition and future results.
The operation of the Rio Grande LNG Facility and any CCS project may be subject to significant operating hazards and uninsured risks, one or more of which may create significant liabilities and losses that could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
The plan of operations for the Rio Grande LNG Facility is subject to the inherent risks associated with LNG operations, including explosions, pollution, release of toxic substances, fires, hurricanes and other adverse weather conditions, and other hazards, each of which could result in significant delays in commencement or interruptions of operations and/or result in damage to or destruction of the Rio Grande LNG Facility and assets or damage to persons and property. These risks may similarly affect any CCS projects.
We do not, nor do we intend to, maintain insurance against all these risks and losses. We may not be able to maintain desired or required insurance in the future at rates that we consider reasonable. The occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
We are dependent on a limited number of customers for the purchase of LNG.
The number of potential LNG customers is limited. Some potential purchasers of the LNG to be produced from the Rio Grande LNG Facility are new to the LNG business and have limited experience in the industry. We will be reliant upon the ability of these customers to enter into satisfactory downstream arrangements in their home markets for the licenses to import and sell regasified LNG. Some of these jurisdictions are heavily regulated and dominated by state entities. In certain instances, customers may require credit enhancement measures in order to satisfy project-financing requirements.
Opposition from local communities or environmental groups can impede or delay the construction and operation of the Rio Grande LNG Facility.
Some local communities and/or environmental groups have voiced opposition to the proposed construction and operation of the Rio Grande LNG Facility as negatively impacting the environment, wildlife, cultural heritage sites or the public health of residents. Objections and administrative and judicial challenges from local communities or environmental groups could cause delays, limit access to or increase the cost of construction capital, cause reputational damage and impede us in obtaining or renewing necessary regulatory approvals. For instance, environmental activists have been active in the permitting process of the Rio Grande LNG Facility and have challenged necessary permits. These third-party actions can materially increase the costs and cause delays in the permitting process and could cause us to not proceed with the development of the Rio Grande LNG Facility.
The Rio Grande LNG Facility will be dependent on the availability of gas supply at the Agua Dulce Hub.
Rio Grande has executed agreements for transportation of natural gas to the Rio Grande LNG Facility on both a firm and interruptible basis to support commissioning and operations and provide the ability to purchase natural gas supplies at the Agua Dulce Hub, giving Rio Grande access to prolific gas production from the Permian Basin and Eagle Ford Shale and providing significant flexibility to obtain competitively priced natural gas feedstock. We expect Rio Grande to have access to multiple interconnects to the existing natural gas pipeline grid located at the Agua Dulce Hub. As the interconnects are expected to be at the Agua Dulce Hub, it is expected that gas will be available for purchase in large volumes at commercially acceptable prices. Nonetheless, disruptions in upstream supply sources or increased market demand could impact the availability of gas supply to the header system, which would result in curtailments at the Rio Grande LNG Facility.
Each liquefaction train for the Rio Grande LNG Facility is expected to involve the transportation for liquefaction of approximately 0.9 Bcf/day of natural gas, for a total of 4.5 Bcf/day for the five liquefaction trains under construction. Gas sales agreements for the supply of these volumes could entail negotiations with multiple parties for firm and interruptible gas supply and transportation services to the pipeline header system, as well as pipeline interconnects and ancillary operational agreements. Delays caused by third parties in the course of negotiating agreements and constructing the required interconnects could delay the start of commercial operations for the Rio Grande LNG Facility.
Litigation could expose us to significant costs and adversely affect our business, financial condition, and results of operations.
We are, or may become, party to various lawsuits, arbitrations, mediations, regulatory proceedings and claims, which may include lawsuits, arbitrations, mediations, regulatory proceedings or claims relating to commercial liability, product recalls, product liability, product claims, employment matters, health, safety or environmental matters, breach of contract, intellectual property, indemnification, stockholder suits, derivative actions or other aspects of our business.
Litigation (including the other types of proceedings identified above) is inherently unpredictable, and although we may believe we have meaningful defenses in these matters, we may incur judgments or enter into settlements of claims that could have a material adverse effect on our business, financial condition, and results of operations. The costs of responding to or defending litigation may be significant and may divert the attention of management away from our strategic objectives. There may also be adverse publicity associated with litigation that may decrease customer confidence in our business or our management, regardless of whether the allegations are valid or whether we are ultimately found liable.
Risks Related to Governmental Regulation
The construction and operation of the Rio Grande LNG Facility remains subject to further governmental approvals, and some approvals may be subject to further conditions, review and/or revocation and other legal and regulatory risks, which may result in delays, increased costs or decreased cash flows.
We are required to obtain and maintain governmental approvals and authorizations to implement our proposed business strategy, which includes the design, construction and operation of the Rio Grande LNG Facility and the export of LNG from the U.S. to foreign countries. As described above under “Business—Governmental Permits, Approvals and Authorizations,” the design, construction and operation of LNG export facilities is a highly regulated activity in the U.S., subject to a number of permitting requirements, regulatory approvals and ongoing safety and operational compliance programs. While the FERC has authorized the siting, construction and operation of the Rio Grande LNG Facility, that authorization has been challenged in an appeal brought by opponents of the project that is pending in the U.S. Court of Appeals for the D.C. Circuit (the “D.C. Circuit”). The project opponents have once again petitioned the D.C. Circuit for review of FERC’s orders, and that appeal is pending. Furthermore, additional approvals from FERC Staff will be required as we proceed with construction and commissioning of the facility consistent with FERC’s authorization. Failure to obtain, or failure to obtain on a timely basis, or failure to maintain any of these governmental authorizations, approvals and permits (including potentially as a result of the latest appeal to the D.C. Circuit) could have a material effect on our business, results of operations, financial condition and prospects.
Our LNG marketing strategy depends on the continued effectiveness of Department of Energy authorizations for exports to
FTA and non-FTA countries. Changes in U.S. policy, delays in processing, or successful legal challenges to export or related approvals
could reduce our ability to contract volumes at acceptable terms or at all. Any adverse determination, modification, or revocation of
existing export authorizations could have a material adverse effect on our business, contracts, financial condition, operating results, cash
flow, liquidity and prospects.
In addition, the authorizations obtained from the FERC, the DOE and other federal and state regulatory agencies for the Rio Grande LNG Facility also contain ongoing conditions and compliance requirements, and additional approval and permit requirements
may be imposed. We do not know whether or when any such approvals or permits can be obtained, or whether any existing or potential interventions or other actions by third parties will interfere with our ability to obtain and maintain such permits or approvals. If we are unable to obtain and maintain the necessary approvals and permits, including as a result of untimely notices or filings, we may not be able to recover our investment in the Rio Grande LNG Facility. Additionally, government disruptions, such as a U.S. government shutdown or the lack of quorum to issue decisions in regulatory agencies, may delay or halt our ability to obtain and maintain necessary approvals and permits. There is no assurance that we will obtain and maintain these governmental permits, approvals and authorizations, or that we will be able to obtain them on a timely basis, and failure to obtain and maintain any of these permits, approvals or authorizations could have a material effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects. In the future, additional regulatory approvals may be required or significant costs may be incurred due to changes in laws and regulations or for other reasons.
In addition, some of these governmental authorizations, approvals and permits require extensive environmental review. We cannot predict or control whether our authorizations, approvals or permits will attract significant opposition or whether the permitting process will be lengthened due to complexities and appeals. Some groups have perceived, and other groups could perceive, that the proposed construction and operation of the Rio Grande LNG Facility could negatively impact the environment or cultural heritage sites. Objections from such groups could cause delays, damage to reputation and difficulties in obtaining governmental authorizations, approvals or permits or prevent the obtaining of such authorizations, approvals or permits altogether. Although the necessary authorizations, approvals and permits to construct and operate the Rio Grande LNG Facility have been obtained, such authorizations, approvals and permits may be subject to ongoing regulatory proceedings, as well as conditions imposed by regulatory agencies, and may be subject to additional legal proceedings not involving us, which is customary for U.S. LNG projects.
The Rio Grande LNG Facility will be subject to a number of environmental laws and regulations that impose significant compliance costs, and existing and future environmental and similar laws and regulations could result in increased compliance costs, liabilities or additional operating restrictions.
Our business is and will be subject to extensive federal, state and local regulations and laws, including regulations and restrictions on discharges and releases to the air, land and water and the handling, storage and disposal of hazardous materials and wastes in connection with the development, construction and operation of the Rio Grande LNG Facility. Failure to comply with these regulations and laws could result in the imposition of administrative, civil and criminal sanctions, compliance orders, liabilities, operational or construction restrictions, difficulty obtaining permits from regulatory agencies, or capital expenditures and operational costs related to compliance or remediation .
These regulations and laws, which include the federal Clean Air Act, the Oil Pollution Act, the National Environmental Policy Act, the Clean Water Act, the Endangered Species Act, the Natural Gas Pipeline Safety Act and the Resource Conservation and Recovery Act, and analogous state and local laws and regulations, restrict, prohibit or otherwise regulate the types, quantities and concentration of substances that can be released into the environment in connection with the construction and operation of our facilities. In addition, we may become subject to enhanced sustainability and climate-related disclosure requirements at the federal, state, or international level, including mandatory greenhouse gas emissions reporting and climate risk assessments. Compliance with evolving disclosure regimes could increase administrative costs. Additionally, these regulations and laws will require and have required us to obtain and maintain permits, with respect to our facilities, prepare environmental impact assessments, provide governmental authorities with access to our facilities for inspection and provide reports related to compliance. Violation of these laws and regulations could lead to substantial liabilities, fines and penalties, the denial or revocation of permits necessary for our operations, governmental orders to down our facilities or to capital expenditures related to pollution control or remediation equipment that could have a material effect on our business, results of operations, financial condition, liquidity and prospects. Federal and state laws impose liability, without regard to or the lawfulness of the original conduct, for the release of certain types or quantities of substances into the environment. As the owner and operator of the Rio Grande LNG Facility and CCS systems, we could be liable for the costs of cleaning up substances released into the environment and for to natural resources.
In addition, future federal, state and local legislation and regulations, such as regulations regarding greenhouse gas emissions, the transportation of LNG, and the sequestration of carbon dioxide may impose unforeseen burdens and increased costs on our business that could have a material adverse effect on our financial results. As an international shipper of LNG, our operations could also be impacted by environmental laws applicable under international treaties or foreign jurisdictions.
Unethical conduct and non-compliance with applicable laws could have a significant adverse effect on our business.
Incidents of unethical behavior, fraudulent activity, corruption or non-compliance with applicable laws and regulations could be damaging to our operations and reputation and may subject us to criminal and civil penalties, loss of operating licenses or other adverse consequences. Due to the global nature of the LNG business and the diversity of jurisdictions in which our customers operate, it is possible that a prospective counterparty could be accused of behavior that falls short of our expectations in this regard, leading to reputational damage and potential legal liabilities, notwithstanding our best efforts to prevent such behaviors.
Changes in legislation and regulations or interpretations thereof, such as those relating to the importation and exportation of LNG and incentives for reduction of emissions, could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects and could cause additional expenditures and delays in connection with the Rio Grande LNG Facility and any CCS projects and their construction.
The laws, rules and regulations applicable to our business, including federal agencies’ interpretations of and policies under such laws rules and regulations, are subject to change, either through new or modified regulations enacted on the federal, state or local level or by a change in policy of the agencies charged with enforcing such regulations. For example, the provisions of the Energy Policy
Act of 2005 that codified the FERC’s policy of not regulating the terms and conditions of service for LNG import or export facilities expired in 2015. Although the FERC has not indicated that it intends to depart from this policy, there can be no assurance it will not do so in the future. The nature and extent of any changes in these laws, rules, regulations and policies may be unpredictable and may have material adverse effects on our business. Future legislation and regulations or changes in existing legislation and regulations, or interpretations thereof, such as those relating to (i) the liquefaction, storage, or regasification of LNG, or its transportation, and (ii) the capture of CO 2 , its transportation and sequestration, could cause additional expenditures, restrictions and delays in connection with our operations as well as other future projects, the extent of which cannot be predicted and which may require us to limit substantially, delay or cease operations in some circumstances. Revised, reinterpreted or additional laws and regulations that result in increased compliance costs or additional operating costs and restrictions could have a material adverse effect on our business, the ability to expand our business, including into new markets, results of operations, financial condition, liquidity and prospects.
Further, in the first few days of his second term in office, President Trump issued a series of executive orders signaling a shift in environmental and energy policy, which could result in significant regulatory changes in the future. For instance, President Trump issued executive orders which revoked prior executive orders and initiatives related to environmental justice and clean energy. While the extent of the Trump Administration's changes to the environmental regulatory landscape in the United States is unknown at this time, it is possible that additional changes in the future could impact our operations.
In addition, any CCS projects may benefit from federal, state and local governmental incentives, mandates or other programs promoting the reduction of emissions. Any changes to or termination of these programs could reduce demand for CCS projects, impair our ability to obtain financing, and adversely impact our business, financial condition and results of operations.
Our ability to utilize our net operating loss carryforwards ( “ NOLs ” ) may be limited as a result of ownership changes under Section 382 of the Code.
The Code contains provisions that limit the utilization of NOLs and tax credit carryforwards if there has been a change in ownership as described in Section 382 of the Code (“Section 382”). Such an ownership change occurs if the aggregate stock ownership of certain stockholders, generally stockholders beneficially owning five percent or more of a corporation’s common stock, applying certain look-through and aggregation rules, increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period, generally three years. Substantial changes in the Company's ownership have occurred that may limit or reduce the amount of NOL carryforwards that the Company could utilize in the future to offset taxable income. At December 31, 2024, we had federal net operating loss (“NOL”) carryforwards of approximately $552.5 million. Approximately $26.1 million of these NOL carryforwards will expire between 2034 and 2038.
Limitations imposed on our ability to use NOLs to offset future taxable income may cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect and could cause such NOLs and other tax attributes to expire unused. Similar rules and limitations may apply for state and foreign income tax purposes. If we experience such an ownership change, it is possible that a significant portion of our tax attributes could be limited for use to offset future taxable income.
Risks Relating to our Securities
Our common stock could be delisted from Nasdaq.
Our common stock is currently listed on Nasdaq. However, we cannot assure you that we will be able to comply with the continued listing standards of Nasdaq. If we fail to comply with the continued listing standards of Nasdaq, our common stock may become subject to delisting. If Nasdaq delists our common stock from trading on its exchange for failure to meet the continued listing standards, we and our stockholders could face significant material adverse consequences including:
• a limited availability of market quotations for our securities;
• a limited amount of analyst coverage; and
• a decreased ability for us to issue additional securities or obtain additional financing in the future.
The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future. Holders of our common stock could lose all or part of their investment.
The securities markets in general and our common stock have experienced significant price and volume volatility. The market price and trading volume of our common stock may continue to experience significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations, business prospects or those of companies in our industry. In addition to the other risk factors discussed in this section, the price and volume volatility of our common stock may be affected by:
• domestic and worldwide supply of and demand for natural gas and corresponding fluctuations in the price of natural gas;
• fluctuations in our quarterly or annual financial results or those of other companies in our industry;
• issuance of additional equity securities which causes further dilution to stockholders;
• sales of a high volume of shares of our common stock by our stockholders (including sales by our directors, executive officers, and other employees) or the perception or expectation that such sales may occur;
• short sales, hedging, and other derivative transactions on shares of our common stock;
• the volume of shares of our common stock available for public sale;
• operating and stock price performance of companies that investors deem comparable to us;
• events affecting other companies that the market deems comparable to us;
• changes in government regulation or proposals applicable to us;
• actual or potential non-performance by any customer or a counterparty under any agreement;
• announcements made by us or our competitors of significant contracts;
• changes in accounting standards, policies, guidance, interpretations or principles;
• general conditions in the industries in which we operate;
• general economic conditions; and
• the failure of securities analysts to cover our common stock or changes in financial or other estimates by analysts.
The stock prices of companies in the LNG industry have experienced wide fluctuations that have often been unrelated to the operating performance of these companies. Following periods of volatility in the market price of a company’s securities, securities class action litigation often has been initiated against a company. If any class action litigation is initiated against us, we may incur substantial costs and our management’s attention may be diverted from our operations, which could materially adversely affect our business and financial condition.
Raising additional capital may cause dilution to existing stockholders, restrict our operations or require us to relinquish rights. Additionally, sales of a substantial number of shares of our common stock or other securities in the public market could cause our stock price to fall.
We may seek the additional capital necessary to fund our operations through public or private equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, existing stockholders’ ownership interests will be diluted, and the terms may include liquidation or other preferences that adversely affect their rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. In addition, sales of a substantial number of shares of our common stock or other securities in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.
Our Second Amended and Restated Certificate of Incorporation grants our board of directors the power to designate and issue additional shares of common and/or preferred stock.
Our authorized capital consists of 480,000,000 shares of common stock and 1,000,000 shares of preferred stock. Our preferred stock may be designated into series pursuant to authority granted by our Second Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”), and on approval from our board of directors (the “Board of Directors” or “Board”). The Board of Directors, without any action by our common stockholders, may designate and issue additional shares of preferred stock in such classes or series as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights. The rights of holders of other classes or series of stock that may be issued could be superior to the rights of holders of our common stock. The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock.
Our largest stockholders will substantially influence our Company for the foreseeable future, including the outcome of matters requiring shareholder approval, and such control may prevent other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.
As of February 20, 2026, affiliates of HGC NEXT INV LLC, TotalEnergies SE and Ninteenth Investment Company (collectively, the “Large Stockholders”) beneficially own, in the aggregate, approximately 47% of the combined voting power of our outstanding shares of common stock. As a result, the Large Stockholders have the ability to influence the election of our directors and the outcome of corporate actions requiring stockholder approval, such as: (i) a merger or a sale of our Company, (ii) a sale of all or substantially all of our assets, and (iii) amendments to our articles of incorporation and bylaws. This concentration of voting power and control could have a significant effect in delaying, deferring or preventing an action that might otherwise be beneficial to our other stockholders and be disadvantageous to our stockholders with interests different from those entities and individuals. Additionally, three members of our Board of Directors are affiliated with certain Large Stockholders. The Large Stockholders also have significant control over our business, policies and affairs by their affiliates serving as directors of our Company. They may also exert influence in delaying or preventing a change in control of the Company, even if such change in control would the other stockholders of the Company. In addition, the significant concentration of stock ownership may affect the market value of the Company’s common stock due to investors’ perception that of interest may exist or arise.
The exercise of outstanding warrants and exchangeable loans may have a dilutive effect on our common stock.
We issued warrants together with the entry into the Corporate Credit Agreement in December 2024 (the “2024 Warrants”) and the upsize of the Corporate Credit Agreement in May 2025 (the “2025 Warrants” and together with the 2024 Warrants, the “Warrants”). The 2024 Warrants were issued on December 31, 2024 in two equal tranches for an aggregate of approximately 7.2 million shares of Company common stock, with the first tranche exercisable at $7.15 per share and the second tranche exercisable at $9.30 per share. The
2025 Warrants were issued on May 14, 2025 for approximately 2.0 million shares of Company common stock exercisable at $9.30 per share. On November 17, 2025, the Corporate Credit Agreement was amended to, in part, upsize the loan by $50 million and recharacterize $50 million of the principal outstanding thereunder as a Series A term loan, the principal of which, including any interest in kind, can be exchanged (the “Exchange Right”) into Company common stock at a price of $9.50 per share.
To the extent the Warrants or the Exchange Right are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that the Warrants or the Exchange Right may be exercised could adversely affect the market price of our common stock.
Provisions of our charter documents or Delaware law could discourage, delay or prevent us from being acquired even if being acquired would be beneficial to our stockholders and could make it more difficult to change management.
Provisions of the Certificate of Incorporation and our Amended and Restated Bylaws (the “Bylaws”) may discourage, delay or prevent a merger, acquisition or other change in control that stockholders might otherwise consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our Board of Directors. Among other things, these provisions include:
• elimination of our stockholders’ ability to call special meetings of stockholders;
• elimination of our stockholders’ ability to act by written consent;
• an advance notice requirement for stockholder proposals and nominations for members of our Board of Directors;
• a classified Board of Directors, the members of which serve staggered three-year terms;
• the express authority of our Board of Directors to make, alter or repeal the Bylaws;
• the authority of our Board of Directors to determine the number of director seats on our Board of Directors; and
• the authority of our Board of Directors to issue preferred stock with such terms as it may determine.
In addition, the Certificate of Incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for any claims, including (i) any derivative actions or proceedings brought on our behalf, (ii) any action asserting a claim of a breach of a fiduciary duty owed by, or any wrongdoing by, a director, officer or employee or (iii) any action asserting a claim pursuant to any provision of the Delaware General Corporation Law, the Certificate of Incorporation or the Bylaws, (iv) any action to interpret, apply, enforce or determine the validity of the Certificate of Incorporation or the Bylaws or (v) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such . Alternatively, if a court were to find the choice of forum provision that is contained in the Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could affect our business, operating results and financial condition.
Attention to sustainability and environmental, social and governance matters may impact our business, financial results or stock price and climate change concerns may pose challenges to our operating model.
In recent years, attention has been given to sustainability and ESG commitments and other activities. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, universities and other members of the investing community. These activities include increasing attention and demands for action related to climate change, promoting the use of substitutes to fossil fuel products, and encouraging the divestment of companies in the fossil fuel industry. While there are some other governments and actors taking different approaches, these activities could negatively impact negotiations with potential customers or financial counterparties, reduce demand for our products, reduce our profits, increase the potential for investigations and litigation, impair our brand and have negative impacts on the price of our common stock and access to capital markets.
In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings systems for evaluating companies on their approach to ESG matters and informing investment and voting decisions. There has been investor demand for ESG investing opportunities, and many large institutional investors have committed to increasing the percentage of their portfolios that are allocated towards ESG-focused investments. As a result, there has been a proliferation of ESG-focused investment funds seeking ESG-oriented investment products. If we obtain an unfavorable ESG rating or if we are unable to meet the investment or lending criteria set by these investors and funds, our stock may be omitted from such ESG-oriented investment products, which may lead to investors allocating a portion of their capital away from us, our cost of capital increasing, the price of our common stock being negatively impacted, and our reputation being negatively affected.
We could also incur additional costs and require additional resources to monitor, report, and comply with various ESG practices and current or emerging regulatory requirements, including with respect to climate change and sustainability. Further, we are currently assessing the potential impacts of the adopted or proposed laws, as well as other sustainability and climate-related disclosure
obligations and evolving legal and regulatory requirements, to which we may be subject. Enhanced sustainability and climate-related disclosure requirements could lead to reputational or other harm to our relationships with regulators, employees, customers, investors or other stakeholders.
Furthermore, we also could face an increased risk of ESG‐related litigation suits, including climate-related litigation, with respect to our operations or disclosures. Claims have been made against certain energy companies alleging that greenhouse gas emissions from oil, gas and LNG operations constitute a public nuisance under federal and state law. Private individuals or public entities also could attempt to enforce environmental laws and regulations against us and could seek personal injury and property damages or other remedies. Additionally, governments and private parties are also increasingly filing suits, or initiating regulatory action, based on allegations that certain public statements regarding ESG-related matters by companies are false and misleading “greenwashing” campaigns that violate trade practices and consumer protection statutes or that climate-related disclosures made by companies are . Similar issues can also arise when aspirational statements such as net-zero or carbon neutrality targets are made without clear plans. There has also been an increase in that corporate diversity, equity and inclusion programs may discriminate certain groups. Although we are not currently a party to any such currently, rulings us in any such case brought us in the future could significantly impact our operations and could have an impact on our financial condition.
Finally, as of January 31, 2025, the Trump Administration had issued a series of executive orders that signal a shift in the United States' energy and climate change policy. Among other directives, such executive orders: (i) direct federal agencies to identify and exercise emergency authorities to facilitate conventional energy production, transportation, and refining, and call for the use of emergency regulations to expedite energy infrastructure projects; (ii) promote energy exploration and production on federal lands and waters; (iii) mandate a review of existing regulations that may burden domestic energy development; and (iv) pause the disbursement of funds appropriated through the Inflation Reduction Act and the Infrastructure Investment and Jobs Act.
General Risk Factors
The Russia-Ukraine conflict, conflict in the Middle East and other sources of volatility in the energy markets may materially and adversely affect our business, financial condition, operating results, cash flow, liquidity and prospects, including our efforts to reach a final investment decision with respect to the Rio Grande LNG Facility.
In February 2022, Russia, one of the world’s largest producers of natural gas, launched an invasion of Ukraine. These actions resulted in a number of countries, including the United States and members of the European Union, announcing sanctions against Russia. Additionally, the Nord Stream 2 gas pipeline project, which was built to provide 55 billion cubic meters of natural gas to Europe annually, has been affected by geopolitical issues and incurred damage that has been investigated as possible sabotage. The current geopolitical climate in Europe is unstable and conflict may further escalate. While it is difficult to anticipate the impact the sanctions announced to date may have on our operations, any further sanctions imposed or actions taken by the U.S. or other countries, and any retaliatory measures by Russia in response, such as restrictions on energy supplies from Russia to countries in the region, could have a significant and uncertain impact on the natural gas industry. In addition, the Israel-Hamas war and maritime attacks in the Red Sea have caused further geopolitical uncertainty, especially as it related to the energy industry.
A sustained disruption in the capital markets from the Russia-Ukraine conflict and hostilities in the Middle East, specifically with respect to the energy industry, could negatively impact our ability to raise capital. In the past, we have financed our operations by the issuance of equity and equity-based securities. However, we cannot predict when macro-economic disruption stemming from geopolitical uncertainty may occur. This macro-economic disruption may disrupt our ability to raise additional capital to finance our operations in the future, which could materially and adversely affect our business, financial condition and prospects, and could ultimately cause our business to fail.
The Russia-Ukraine conflict may also have the effect of heightening many of the other risks described in this Annual Report on Form 10-K, such as risks related to the development of any CCS projects and the Rio Grande LNG Facility, including postponement in making a positive FID on expansion capacity at the Rio Grande LNG Facility, doing business in foreign countries, obtaining governmental approvals, and exported LNG remaining a competitive source of energy for international markets, global demand for and price of natural gas, and fluctuation in the price of our common stock.
The ultimate outcome of Russia’s invasion of Ukraine, including resulting tensions among the United States, North Atlantic Treaty Organization and Russia, disruption to the production and supply of natural gas throughout Europe, cyberwarfare and economic instability, could impact our operations or disrupt our ability to access the capital markets. The duration of the impact of the Russia-Ukraine conflict and hostilities in the Middle East is uncertain, and we may continue to experience materially adverse impacts to our business as a result of their global economic impact, including any recession that has occurred or may occur in the future, and lasting effects on the price of natural gas.
Cyberattacks targeting systems and infrastructure used in our business may adversely impact our operations.
We depend on digital technology in many aspects of our business, including the processing and recording of financial and operating data, analysis of information, and communications with our employees and third parties. Cyberattacks on our systems and those of third-party vendors and other counterparties occur frequently and have grown in sophistication. A successful cyberattack on us or a vendor or other counterparty could have a variety of adverse consequences, including theft of proprietary or commercially sensitive information, data corruption, interruption in communications, disruptions to our existing or planned activities or transactions, and damage to third parties, any of which could have a material adverse impact on us. Further, as cyberattacks continue to evolve, including use of artificial intelligence, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to and remediate any to . Since the techniques used to obtain access to or to systems change frequently and are not often recognized until after they are launched a target, we may be to anticipate these techniques or to implement adequate preventative measures.
Terrorist attacks, including cyberterrorism, or military campaigns involving us or our projects could result in delays in, or cancellation of, construction or closure of the Rio Grande LNG Facility.
A terrorist or military incident involving the Rio Grande LNG Facility or any CCS project may result in delays in, or cancellation of, construction of the Rio Grande LNG Facility or the relevant CCS project, which would increase our costs and prevent us from obtaining expected cash flows. A terrorist incident could also result in temporary or permanent closure of the Rio Grande LNG Facility or such host industrial facility, which could increase costs and decrease cash flows, depending on the duration of the closure. Operations at the Rio Grande LNG Facility and any CCS projects could also become subject to increased governmental scrutiny that may result in additional security measures at a significant incremental cost. In addition, the threat of terrorism and the impact of military campaigns may lead to continued volatility in prices for natural gas that could adversely affect our business and customers, including the ability of our suppliers or customers to their respective obligations under our commercial agreements. in the financial markets as a result of terrorism, including cyberterrorism, or war, including the Russia-Ukraine or hostilities in the Middle East, could also materially affect our ability to raise capital. The continuation of these developments may subject our construction and operations to increased risks, as well as increased costs, and, depending on their ultimate magnitude, could have a material effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
